Money Rates Advance as Banks Reluctant to Lend Amid Recession

By Patricia Lui

Nov. 18 (Bloomberg) -- Money rates rose in Australia and Japan as banks remained reluctant to lend even as central banks pump cash into the system to combat the global recession.

The rate Australian banks charge each other for three-month loans climbed 1.7 basis points to 4.62 percent as of 10:07 a.m. in Sydney, snapping 12 days of declines. South Korea's one-year currency swap rate dropped to as low as 0.12 percent, showing the country's banks are starved of dollars even as the Bank of Korea sold $2 billion of the U.S. currency direct to local banks. Japan's rate for three-month yen loans rose for an eighth session to 0.817 percent at the 11 a.m. fixing in Tokyo.

``It's symptomatic of on-going tensions and the uncertain outlook with banks still unwilling to offer liquidity into the market at this stage,'' said Glenn Maguire, chief Asia economist at Societe Generale SA in Hong Kong. ``The confirmation of Europe and Japan's recessions and recent weak global data is reigniting a more cautious approach in lending.''

U.S. Treasury Secretary Henry Paulson said financial markets will ``remain stressed'' for months. Indications the economic slump is deepening helped to arrest a 23-day drop in three-month dollar rates in London last week. European Central Bank council member Christian Noyer said in Tokyo today that credit-market tensions persist and India's ICICI Bank Ltd. slashed lending plans, adding to concerns a deepening world economic slowdown is drying up credit.

Japan's economy entered its first recession since 2001 in the third quarter, a government report showed yesterday.

Tensions in Markets

``Tensions on money markets are still with us'' more than a year after the global credit crisis began, ECB council member Noyer said at the Paris Europlace Financial Forum in Tokyo today. ``These tensions are also affecting non-financial corporations and, more broadly the financing of the economy.''

The Korean swap rate fell 4.6 basis points to 0.15 percent as of 1:56 p.m. in Seoul. The rate, a gauge of the availability of dollar funding, averaged 3.3 percent this year before Lehman Brothers Holdings Inc. collapsed on Sept. 15.

ICICI, India's second-largest bank, halved its target for growth in lending to 15 percent as global financial-market turmoil spills into Asia's third-largest economy.

Libor Rising

The London interbank offered rate, or Libor, for three-month U.S. dollar loans rose for a third day yesterday, advancing less than half a basis point to 2.24 percent, according to the British Bankers' Association. Libor, the benchmark for $360 trillion of financial products worldwide, is set by a panel of banks in a daily survey by the BBA before noon in London.

The Libor-OIS spread, a gauge of cash scarcity among banks, widened 2.4 basis points to 175.5 basis points yesterday. The TED spread, which measures the difference between what the U.S. government and banks pay for three-month loans, was at 212 basis points, from 216 basis points yesterday.

``I definitely think we are going to see the challenge of tighter liquidity towards year-end,'' Maguire of Societe Generale said. ``Money markets are starting to get particularly worrisome about funding conditions over the turn of the year.''

Japan's TED spread rose for a fourth day, climbing 0.42 basis point to 38 basis points, the widest since Nov. 5. The country's funding costs have gained after the Bank of Japan cut its benchmark rate to 0.3 percent on Oct. 31. Three-month Tibor has increased by 2.6 basis points since dropping to a 14-month low after the BOJ lowered borrowing costs by 20 basis points.

Australian Banks

Australia's central bank pumped A$1.33 billion ($864 million) into money markets today after estimating the shortfall would be A$1.4 billion. The country's banks reduced deposits held at the RBA by A$362 million to A$4.1 billion yesterday, the central bank said on its Web site.

The difference between the Australian three-month bank bill yield and the overnight indexed swap rate, a measure of funding availability, rose 2.9 basis points to 35.8 basis points.

Singapore's three-month interbank rate for U.S. dollars slipped 4.2 basis points to 2.23 percent after advancing the two previous days. Hong Kong's three-month interbank offered rate, or Hibor, declined for a second day, slipping to 2.10 percent at the 11:15 a.m. fixing in Hong Kong.

To contact the reporter on this story: Patricia Lui in Singapore at plui4@bloomberg.net